CHICAGO — At Bally Total Fitness' shareholder meeting last January, the investors cast their vote on whether or not to oust Paul Toback, former chairman and CEO, and to elect new members to the board. The measure to oust Toback failed, but two new board members were elected — Don Kornstein and Barry Elson — and the two men are now running the company as the interim chairman and CEO after Toback's involuntary resignation.

One year later, the annual meeting last month attracted less than half of the number of shareholders as last year's meeting, which had 100 attendees. Investors backed all three of the board's recommendations to re-elect Don Kornstein, the current interim chairman, for a three-year term as a Class I director until 2009; to approve the equity compensation plan; and to ratify the appointment of KPMG LLG as the independent auditor.

The Bally board didn't include the vote for an equity compensation plan in its original proxy, but later amended it to allow shareholders to vote on the distribution of shares to the employees. If the shareholders did not approve the equity compensation plan, the board would not have been able to grant equity-based awards to employees and non-employee directors. Jim Booker, a Bally Total Fitness shareholder and industry veteran, says he had expected shareholders to approve the equity compensation plan. He was also not surprised to see Kornstein re-elected for another term.

“Everything indicates that he (Kornstein) is quickly getting a grip on things,” he says.

Bally has a class structure board, which means that different board members are up for election during different years.

The board recommended Kornstein for a three-year term to even out the number of directors who will be up for re-election each year. Bally's board, which once had nine members, is down to four due to board member resignations, and many of the members who left would have come up for re-election in three years.

“I think we will look at the makeup of the board in the near future, but at this point, we're happy with the board,” says Matt Messinger, spokesperson for Bally. “They seem to be working well together.”

Bally also announced that it is investing in its top performing clubs and selling off underperforming clubs. The company recently generated $13.5 million in net proceeds from the sale/leaseback of four properties. The transactions enabled Bally to satisfy the senior credit facility requirement of raising at least $20 million in additional liquidity by the end of 2006.

Booker supports the sale of underperforming clubs.

“Trying to sell off some of their nonproducers is a really good move,” he says. “Bally had a lot of clubs that they were hanging on to that they should have been selling off. The company will remain strong as long as they make those kind of moves.”

Michael Scott Scudder, an industry consultant, says the company appears to be orchestrating a possible turnaround. Bally has made steps in that direction by making its board of directors a more manageable size, trying to make its profitable clubs more profitable and unloading the underperforming clubs, he says. Now the company needs to find a way to deal with the subordinated debt, which is due in October 2007, he says.

“If they haven't turned the company sufficiently by then to pay those off, there will likely be another attempt at re-financing, this time taking that debt and turning it into some form of convertible bond with either a stock kicker or warrants,” he says.